Price of oil reflects weather, demand, production, politics

The Outlook

$27 a barrel is possible this winter, but not likely to last very long

July 18, 1999|By Rachel Sams

OPEC's cutback in crude oil production and a rising demand for gasoline and other refined products could lead to the biggest oil shortage in more than a decade this winter, according to the International Energy Agency. The IEA acknowledged that a further rise in prices , which have nearly doubled since December, would probably tempt oil-producing countries to break ranks and boost output. But OPEC, blamed for driving the cost of a barrel of oil to almost $40 in 1980, is now seeking to keep prices low enough so that its customers are happy and less-productive oil suppliers, such as the United Kingdom, Angola and Colombia, don't usurp market share. A rise in prices could prompt OPEC to increase production.

How realistic is the IEA projection of an oil shortage? What factors would make that happen? What's the prospect for winter oil prices?

We are destocking at a rapid rate entering the third quarter. This will cause an upward momentum in price. The only thing that would short-circuit that would be a mild winter, which would defuse some demand, or if OPEC decides to revisit the compliance situation in September.

If, in fact, OPEC means not to review this until March, there is a significant possibility that oil prices will move a lot higher than Wall Street and oil markets generally think. A lot of people are misunderstanding the oil market that we are having presently.

The gradual improvement in Far East activity will rebuild oil demand. The crude oil supply above ground in the Far East is below normal. This was noticeable in China in May: Demand was rekindling, production was flat and imports were going up. The Pacific Rim is starting to bubble again. It will reinstitute the demand we had lost a year ago.

Our minimum forecast for fourth-quarter oil prices is $21 to $22, and we've raised the upside range to $24 to $25. That's not out of the question.

Frederick P. Leuffer

Senior energy analyst, Bear, Stearns & Co. Inc., New York

OPEC is under-producing the market for the second-half demand by so much.

If OPEC stays where they are, inventories will draw down at a faster rate than we've seen in a long time. There could be a severe tightness in the market, to the point where inventories that are high by historical standards go to inventories that are low by historical standards. The market psychology will shift from surplus to shortage.

If the consensus supply and demand forecast is right, and OPEC stays around the 26 million barrels a day level, we are going to create a shortage mentality.

The overwhelming issue is OPEC's action on supply. I think OPEC will increase production, but not just yet.

The oil industry was so shaken last year by very low oil prices. Budgets came down, and the industry was very reluctant to increase spending as prices rebounded.

Prices could get shockingly high. I think we could see them as high as $27 a barrel, but I don't think they would stand there for a long period of time. Somewhere in the range of $20 to $25 [is more likely].

Barney Gray

Oil and gas analyst, Williams De Broe, London

All other things being equal, yes, there will be shortages. However, if prices start to get too high, there are checks and balances there in the system. I always think markets tend to adjust themselves.

When the OPEC quotas were agreed on, the market was factoring in 75 percent compliance. OPEC compliance is about 91 percent, which is unprecedentedly high.

Because of such strong compliance, oil prices have skyrocketed. No one expected these kinds of levels. Ideally, what I think OPEC wants is just a bit of stability. We could certainly live with $17 to $18 a barrel for a few months. I think prices will remain up in the second half. I wouldn't be surprised if there is a little more upside.

However, people have to remember that during the first half of the year, prices only averaged around $13.

Even with a really great second half, we're still looking at an average of $16 to $17, which many people in the industry would be very pleased with.